CONTROL over income tax rates and levels, part assignment of VAT revenues, control over air passenger duty – and more borrowing powers: whether it’s enough or too little pales before the reality of deeply constrained public finances – in every part of the UK.
The full extent of that constraint will be set out in Chancellor George Osborne’s Autumn Statement this Wednesday. A good year of economic growth and particularly in numbers in work: the textbook conditions for a surge in government tax revenues.
But no surge has resulted. Instead, there is more reliance than ever on borrowing, and debt continues to spiral. Even stamp duty revenues are now falling short of target despite a rise in house prices. Seldom will failure have been so heavily disguised as progress or depleted coffers made to appear as a job competently done.
And all this while a tumbling oil price – down to $73.19 a barrel over a turbulent week, and tearing into already under-shooting tax revenues – presents both Osborne and Scottish finance minister John Swinney with severe problems.
We may have “more powers” – but the reality overlooked in the cascade of commentary over Lord Smith’s Fiscal Commission is that for as far ahead as we can see the Scottish Government is going to be operating within far greater limits than policymakers have allowed for. As for more borrowing powers, details of which have still to be revealed, these in current circumstances have about as much allure as putting lipstick on a pig. For it is borrowing and debt that wholly and directly account for the big problems we face.
I appreciate that these are considerations rarely raised by the Scottish Government: what matters is “more powers”. To the extent that debt and deficit problems figure, these are dismissed as “Westminster problems”, part of the awful Tory austerity from which “more powers” will deliver us. Nothing could be further from the truth.
The reality of tax revenues falling markedly short of almost all expectation should not be lost on a Holyrood administration heady with the prospect of more powers over income tax. The reality, as Osborne will reveal, is that for all his pulling on those economic levers, results can be the opposite of those expected.
The headline figure to look out for this week is public sector net borrowing. The figure projected in the March Budget was of a fall in this borrowing figure to £86 billion in the 2014-15 financial year. Instead, borrowing has been running 6 per cent higher in the seven months to October. We are thus likely to see a sharp upward revision to £97bn.
For a government pledged to bear down on borrowing this is a major disappointment at the heart of its mission.
Tax revenues have been the big disappointment, with weak wage growth the main culprit. The economic upturn has not been creating enough higher rate or additional rate taxpayers.
And such problems have not come singly. Over the first seven months of the year, receipts from offshore corporation tax were down by 34 per cent year-on-year and receipts from petroleum revenue tax were down by 63 per cent.
Now comes a further disappointment: lower than expected stamp duty revenues. The Office for Budget Responsibility (OBR) was so confident back in March on the back of evidence of a booming housing market that it forecast a 36 per cent surge in stamp duty inflows. But since then there has been a slowdown. Revenue growth slowed to just 4 per cent last month. So while there is still an advance on 12 months previously, the flows are running below the target set for the full year.
There are also downside risks to the higher revenue forecasts from capital gains tax and self-assessed tax returns. We won’t know the full picture until the figures for January are collated and the Treasury is hoping for a significant boost. But there is scope for disappointment even here.
As if to make matters worse, the OBR is likely to reveal figures showing that more of this already wider deficit is deemed to be deeply embedded – “structural rather than cyclical” in economist parlance. This means in effect that economic improvement will not on its own bring a lower deficit but that tax increases and/or further government spending cuts – “austerity” – will be needed from whichever government or uneasy coalition is formed after the election next May.
For the record, public sector net debt – the total that the government owes rather than just the annual amount by which the debt is increasing – is set to rise from the previous estimate of £1.4 trillion to £1.58 trillion, or 82 per cent of GDP.
However, on the positive side, the Autumn Statement is expected to see a lift in the OBR forecast of economic growth this year from 2.7 per cent to 3 per cent. For 2015 the expectation is of growth between 2.4 per cent and the 2.9 per cent forecast recently by the Bank of England.
And the benign effects of a lower oil price as I set out here earlier this month should help to underpin these growth forecasts. One immediate effect will be on a lower than expected inflation figure – down to 0.8-0.9 per cent – which in turn should push out the long-awaited turn in the interest rate cycle to the fourth quarter of next year – very good news indeed both for mortgage borrowers and for business.
This should keep overall UK growth running at 3 per cent over the coming quarters and with an equivalent uplift for the economy in Scotland.
UK-wide performance, says Citigroup UK economist Michael Saunders, should be “fuelled by strong growth in household real incomes, consumer spending and business investment”.
That will be good news for all of us – and not least for Osborne. But in terms of making a material impact on those horrific debt and deficit totals, it has all come too late.
Opponents of the Conservatives in Scotland may feel they have cause for cheer over Osborne’s discomfort. Reading across to the implications for future Scottish budgets, it would not do to cheer too early.
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